14-Oct-2004Annual Report
ITEM 2. MANAGEMENT DISCUSSION / PLAN OF OPERATIONS
The core business model of IGDC is to provide strategic, financial and investment tools to help deliver economic development, empowerment and financial self-sufficiency for Native Americans across the U.S. and for indigenous people throughout the world. To reach its objectives the Company's priority areas include sales of Canadian First Nations natural gas into the U.S., work to develop and acquire power projects, investment financing in Indian Country and efforts to develop its healthcare programs for Native American communities throughout the U.S.
IGDC as a Native American majority owned company has many advantages over a traditional company. As a tribal recognized federal section 17 company the advantages include no state and federal taxes on certain projects, quicker permitting of power plants projects, access to tribal natural resources, access to lower cost capital and Federal sales set asides programs.
Advantages Available to Native Owned Companies
Many advantages are available to Indian owned businesses that are not available to the public. These advantages amount to a substantial savings for project financing. American Indian based projects located on reservation property can have these advantages within the power business:
1) PERMITTING The Tribal Nations have the authority to permit power plants within 15-30 days that are 50 megawatts or smaller. This advantage is substantial when compared to a non- reservation based project that will require at least 18-24 months of process work and at least 3-5 million dollars in costs.
2) ENVIRONMENTAL ASSESSMENT The Tribal Governments also have a unique relationship with the federal government relative to environmental assessment. This process can be permitted by the Tribe and approved by the Bureau of Indian Affairs. This process can take 15% of the time of a general environmental review by the state governments.
3) RESERVATION BASED SITES The Tribal governments have industrial parks which have already completed their environmental assessments and are currently designated as development sites. These sites are all under Tribal authority and have all the attributes of an industrial park: land, water, electricity, access to natural gas and electrical transmission lines, zoning permits for industrial development and access to major highways.
4) ACCESS TO WATER The Tribal governments have water rights within the boundary of the reservations. These rights are related to the Treaties signed between the United States and the Indian Tribal Nations. The water is controlled by the Tribal government and is available to the industrial sites for power plants.
5) NATURAL GAS SUPPLY Tribal Nations currently own 17 trillion cubic feet of natural gas within the United States, according to the Department of Interior. In Canada, the estimate is at least 2-3 times the U.S. supply. The development of this natural gas source is minimal. However, the Tribes that do have the natural gas supply have indicated their willingness to enter into agreements to supply natural gas to the Indian owned merchant power plants in return for a percentage of the net revenue.
6) TAX AVOIDANCE Products delivered to a reservation site do not have to pay sales taxes on the product. The turbines, which can amount to 15-150 million dollars, would have a tax avoidance of 1.2 million dollars to 12 million dollars.
A second tax avoidance is corporate profit taxes. A Tribal corporation does not have to pay corporate profit taxes in certain circumstances on its activities on tribal lands or in performing certain governmental functions. This is a substantial savings.
7) FEDERAL PROCUREMENT CONTRACTS The Federal Government has a program that sets aside approximately 4,000 megawatts of power sales contracts for minority companies. This will be a primary advantage during times when the power sales are diminished and the costs are escalating.
8) COMMUNITY REINVESTMENT ACT ("CRA") EQUITY AND DEBT Tribal corporations have the designation as minority companies within the federal government and therefore are eligible for financing through the CRA. Banks that have merged have a responsibility to provide capital to the communities they served before the merger and after the merger. For example, Washington Mutual Bank has a 120 billion dollar commitment over a ten-year period. This commitment was a part of the merger between Washington Mutual and Dime Bancorp. The U.S. Comptroller of the Currency regulates the commitment. A bank can meet its obligations by contributing equity and debt to a minority company to finance major energy projects or other economic projects.
9) HUB ZONE PROGRAMS Tribal areas are designated as HUB Zones and are therefore eligible for federal contributions from the federal government when a major contractor subcontracts with an American Indian business. The Federal Government will contribute up to 5% of the contract amount back to the subcontractor as an incentive to the major contractor.
10) RESERVATION BASED NATURAL GAS PIPELINES
Many Indian Tribal reservations have negotiated natural gas pipeline system leases which permit the pipeline to use Tribal lands for transmission of the natural gas supply throughout the United States and Canada. These rights also often offer the Tribal reservations usage rights to the natural gas supply. Many of the Tribes have not used the rights to date and these rights can become a new source of natural gas supply and a new source of collateralized capital.
11) RESERVATION BASED TRANSMISSION LINES
The major energy companies throughout the United States have leased Tribal lands to access the energy market by transmission of electrical power through the reservations. These transmission lines are another source of capital and negotiated power sales contracts. The Tribes have not used this structure to date but there is a future in negotiated leases for capital strategies.
The Company energy projects located off the reservation can expect to have the following benefits:
12) ACCESS TO TRIBAL NATURAL GAS
Tribes in the United States and Canada recognize Indian Corporations both on and off the reservation. Therefore, the Company energy projects are expected to have access to Tribal natural gas and thus should be able to economically benefit from negotiated reduced costs.
13) ACCESS TO COMMUNITY REINVESTMENT ACT CAPITAL
The Company is a majority owned American Indian company and is therefore qualified for Community Reinvestment Act (CRA) capital. The fact that a project is located off reservation does not preclude the project from eligibility for CRA financing. The CRA finance structure can enable the Company to access vast amounts of equity and debt funds from banks that have recently merged are under an obligation to provide capital back to their respective communities.
14) ACCESS TO FEDERAL POWER SALES SET ASIDES FOR MINORITY FIRMS
The federal government has a national set aside program for minority firms that have the capacity to provide energy to federal facilities, both military and general government. This program has up to 4,000 megawatts of power sale potential nationwide. The Company is qualified as a minority firm and therefore is eligible for this federal program.
Using these advantages, and in line with its ambitious growth objectives for the 2003/2004 fiscal year, the Company has made substantial progress in its three main focus areas - energy development, tribal finance and healthcare.
Growth and Strategy for the Company's Programs
In mid 2004 the Company held a comprehensive corporate planning session to explore short and long-term strategies and planning for the company. This effort helped management develop growth strategies and quarterly, six month and yearly goals to manage IGDC's current and anticipated growth in the upcoming 2004/2005 fiscal year. The goals and strategies identified included incorporating a new holding company, recruitment of new members to its corporate board of directors, reorganization of its management structure, adding new office space and targeted staff to handle the upcoming growth.
First Indigenous Depository Company LLC
In December 2003, IGDC organized the First Indigenous Depository Company (FIDC) as a federal Section 17 company on the Warm Spring Indian Reservation in Oregon. FIDC is a holding company of IGDC and organized to develop the potential to provide economic resources to Indian Country. It will engage in energy projects, structured finance, economic planning and economic education reformed for Indian Country.
To provide need expertise and staff for the FIDC effort, the Company signed an agreement with Breakwater Investment Group, LLC in March. Under the joint venture, FIDC and Breakwater formed First Indigenous Investment Group (FIIG) to provide investment and financial services for Native and Indigenous tribal projects in the United States, Canada and with international financial institutions. FIDC and its First Indigenous Investment Group's offices are on the Warm Springs Indian Reservation in Oregon and have an administrative office in San Francisco.
Using the FIIG model brings a dedicated team of seasoned financial professionals to our model for tribal finance and investment advice and is the first financing and investment model dedicated to Native Americans and Indigenous peoples' economic development projects. This arrangement also provides the company with an Indigenous financial institution to deposit the natural gas revenues derived from the sale of First Nations natural gas into the U.S. The New offices for FIDC and FIIG opened on the Warm Springs Indian reservation in August 2004. An administrative office is also open in San Francisco.
Board of Directors
IGDC is pursing the addition of six board members to its existing board of directors. The proposed board members identified by IGDC bring added industry expertise to help the Company grow. The proposed new board members include two tribal chairmen, a healthcare CEO, an aviation and energy CEO, a natural gas and renewable energy CEO and the president of a entertainment and consumer company. The six new board members once they accept the position will join the existing two board members - the CEO and Corporate Secretary.
At this time the healthcare and the natural gas/renewable energy Chief Executive Officers have accepted the board of director positions. Completion of new board of directors process is expected by the end of the second quarter of the corporate fiscal year.
Reorganization of IGDC's Management Structure
To streamline the Company's processes and ensure continuity and structure to its programs, IGDC reorganized its management structure in July 2004. The reorganization included naming a Chief Operating Officer and four Managing Directors. Under this structure, the Managing Directors oversee the staff and programs in the following areas: Energy, International Programs, Healthcare, Tribal Relations and Finance.
Office Expansion and Staff Additions
The First Indigenous Depository Company LLC (FIDC) offices opened on the Warm Springs Reservation in August 2004. IGDC is still in the process of opening its first overseas office in Tokyo, Japan. The Japan office will provide room for its proposed international staff and its planned expansion of its Mag Power electric generator and wind turbine program.
In the past fiscal year, IGDC also added additional full-time and consulting staff to help it deliver on its business model. The new staff are in administration, finance, sales, energy, healthcare, international programs and housing to bring the total number of full-time, contract and part-time employees from 8 employees in 2002/2003 to 23 in fiscal year 2003/2004. IGDC is also completing an Employee Stock Ownership Plan for its employees.
The accomplishments by the Company in the areas of Energy, Tribal Financing and Healthcare for fiscal year 2003/2004 are outlined below.
Energy Program
The Company's energy program had great successes in fiscal year 2003/2004 and in the first quarter of 2004/2005. The programs accomplishments, this year, are outlined in the following areas: natural gas sales, peaker and baseload power plant program, Mag Power and renewable energy, strategic partnerships, new business opportunities and the hiring of key energy staff.
1) Natural Gas Program
IGDC completed its first purchase and transport of Cree Energy, Ltd., Canadian First Nation's natural gas from Canada into the United States in August 2004. This purchase and transportation of natural gas from the Thunderchild First Nations Tribe through Cree Energy completed IGDC's first phase efforts to support the Canadian First Nations Tribes' goal to create a model for self-management of their natural resources. The "first time" sale is a historical event in which indigenous tribal companies utilized treaties and their sovereign status to trade commodities across the United States and Canadian borders - sovereign indigenous nation to sovereign indigenous nation. This sale represented the first revenue stream from the Company's natural gas program.
Phase two of the Company's natural gas program will begin in October/November 2004. In this phase, IGDC plans to increase the purchase and transport of Canadian natural gas into the U.S. nine-fold each quarter and is hoping to reach revenues from $36 to $108 million in the first full year of natural gas sales.
IGDC's contract with Cree Energy, LLC (signed in March 2004 with Lafond Financial) allows the Company to purchase and sell 92,700,000 MMBtus (90 billion cubic feet) of natural gas into the United States in fiscal year 2004/2005. The Company can also purchase the natural gas at a significant discount to the U.S. spot market, for the next 25 years. IGDC will sell the natural gas to established purchasers and use it to fuel its power plant program. IGDC's proposed program includes 10 - 43 megawatt peaker and 49.5-megawatt baseload plants scheduled to start this year to support this nation's demand for reliable clean power.
2) Peaker and Baseload Plant Program
Natural gas is the major expense to run a gas-fired co-generation electric power plant (70 to 75 percent of the total cost). With a reliable and discounted rate on natural gas, IGDC is also focusing its efforts on acquiring and managing gas-fired electric power plants in the Western States ranging from 43 and higher.
This plan includes plants on Native Tribal and non-native lands. The work to complete in this area includes securing power purchase agreements, development financing, obtaining needed approvals and acquisition of selected projects.
As a tribal recognized company IGDC's advantages include no state and federal taxes on certain projects, quicker permitting of power plants projects, access to tribal natural resources, access to lower cost capital and Federal sales set asides programs.
Using these advantages, IGDC's strategy is to focus on developing up to ten 43 megawatt (MW) Peaker plant projects and 49.5 MW base load power plants on Native American owned land within the next five years.
IGDC is also seeking funding for its first California based peaker plant and hopes to obtain approvals and begin construction early in 2005
IGDC also contracted with PB Power in June 2004 to help it design its first peaker plant project and assist it in its efforts to secure a power purchase agreement in California.
3) Mag Power and Renewable Energy Programs
In May 2004, IGDC and Mag Power Japan Corporation, Ltd. signed a contract making IGDC the exclusive distributor of Mag Power's innovative electrical power generation products in the Western Hemisphere. The joint development contract allows the Company to assemble, distribute and market the Mag Power products in the Western Hemisphere for five years with a five-year renewable option. IGDC is in negotiations to site an assembly facility for the final Mag Power products on native lands on the West Coast. This effort can create up to 100 jobs for tribal members
The Mag Power program includes two products. The first is the Magnetic Accelerator Electric Generator that uses is an innovative invention that uses an enclosed wind box turbine and magnet technology to generate low cost renewable energy electricity. The second product is the Micro Turbine Technology which is a revolutionary Double Rotor System that provides approximately twice the amount of energy previously offered by other wind turbine generators. This enables considerable energy savings to customers and promotes environmentally friendly renewable energy practices.
The new wind energy generators come in one, thirteen and fifty kilowatt units and can be placed directly on the home, office or business structure. Once the Mag Power units are assembled and manufactured on Native American tribal reservation lands, the units will then be marketed and installed using a franchise program for the U.S. and the Americas. The first micro-turbine model installation was in April 2004. The first shipment of the Mag Power products into the U.S. for marketing is expected in early 2005.
4) Strategic Partnerships
To gain momentum in its energy program IGDC signed the following strategic partnerships in fiscal year 2003/2004 and in the first quarter of 2004/2005:
IGDC contracted with TRC Solution, Inc. in August 2003 to assist it in several energy initiatives including developing a natural gas fired electrical generating facility on the West Coast. TRC's work included providing expertise in financing, permitting and construction of power plant projects. It's expertise on natural gas
also helped IGDC complete the first ever Tribal nation to Tribal nation sale of the Canadian First Nations natural gas into the U.S
In November 2003, IGDC signed a joint venture agreement with Challenger Investment Company (CIC). CIC's consultant role included providing added resources including marketing, human resources and expertise and contacts in the natural gas business. Additional support by CIC included marketing of the First Nations natural gas, assistance in developing a natural gas exploration and gathering program and training of Tribal members in the natural gas business.
In May 2004, IGDC signed a contract with Mag Power Japan Corporation Ltd. to be the exclusive distributor of Mag Power's innovative electrical power generation products in the Western Hemisphere.
In March 2004, IGDC announced the signing of an agreement with Cree Energy, LP to buy and sell Canadian First Nations natural gas in the United States.
In June 2004, IGDC hired PB Power to help it plan its first peaker plant and assist it in its efforts to secure a power purchase agreement in California.
In July 2004, IGDC joint ventured with SNC Solutions to produce an innovative water turbine technology to create electrical energy. In September 2004, this team presented this model and is in the final stages of obtaining a power purchase agreement from the City of Colton in California.
In July 2004, IGDC signed a memorandum of agreement to be the Northern Cheyenne Nation's financial and strategy advisor on its energy projects. Under this agreement, IGDC will help the Northern Cheyenne finance and build a 30 megawatt wind farm on tribal land.
IGDC also maintained its existing agreements with its valued partners such as General Electric and Chevron Energy Solutions.
5) New Business Opportunities
IGDC is registered under the Central Contract Registration program with the federal Government and received its first contract with the Bureau of Land Management in August. The project is a drilling program for just under $18,000.
The Company joint ventured with SNC Solutions in July 2004 to work on and develop an innovative water turbine technology for electrical power generation. This team presented the technology to the City of Colton in California and is working to obtain an electrical power purchase agreement from the City of Colton.
6) Key Energy Staff
In addition to the key partnerships with General Electric, Chevron, TRC Solutions, PB Power, and Cree Energy, IGDC also sought out and hired staff with the appropriate energy industry background. In fiscal year 2003/2004 IGDC hired a Director of Energy Services and a Director of Renewable Energy and Sustainable Programs. The company also appointed a Managing Director to oversee IGDC's energy programs.
Tribal Financing and Its Other Programs
1) IGDC Mortgage Group Formed
IGDC formed a new division, IGDC Mortgage Group to assist Native American Tribes pre-qualify for home mortgage loans and provide them with low-monthly payments. The mortgage group is working with the Housing and Urban Development department and its Office of Native American Programs to jointly develop and finance large housing projects with Native American tribes. IGDC obtained its corporate brokers license certificate in February 2004 and can now work directly with financing firms.
The mortgage group began presenting its low cost mortgage program to California tribes in the late 2003. It is negotiating a source for low cost pre-fabricated housing for its Native Housing program. The housing projects are expected to begin in late 2004 and include 900 homes and two schools for a total projected IGDC Mortgage Group portfolio of $20 to 30 million in 2004 and 2005.
2) Healthcare Program
IGDC organized the Netpharmx, LLC on the Confederated Tribes of Warm Springs Indian Reservation of Oregon this year. The goal of NETPHARMX, a Global Healthcare Company and holding company of IGDC, is to provide healthcare products and services to Native American health centers across the U.S. at up to 50 percent below market prices. The company's goal is to provide a single source pharmaceutical, manufacturing and distribution company to help it provide pharmaceuticals for the $2.5 billion annual Indian Health Services market. Its plans include expansion of distributed pharmaceuticals to Hispanic and Black health centers.
Its main offices will be on the Warm Springs Reservation in Oregon, to provide investment opportunities and jobs for Oregon Native American tribes and substantial tax savings for NETPHARMX.
To date, NETPHARMX has identified a drug manufacturer and is working on identifying the first generic drugs to be introduced into Tribal clinics in California.
The Company is also working on obtaining funding for a replicable diabetes detection and diagnosis program for Native American tribes on the West Coast. NETPHARMX is currently seeking approvals and funding to put up two sites for diabetes treatment centers on Native lands. The first site is slated for a Tribal Nation in Oregon.
Other Recent Developments
1) $1.1 Million Raised Using a 506 Limited Offering Memorandum
IGDC opened a 506-limited offering memorandum which will offer for sale to "accredited investors" up to 3,000,000 units, each consisting of one share of common stock and one common stock purchase warrant at an offering price of $.50 per unit. Each warrant will entitle the holder to purchase one share of common stock at a price of $1 per share on or before February 28, 2005. From this Limited Offering Memorandum IGDC raised $1.1 million was raised in operating capital for payment of existing liabilities, corporate working capital which includes legal and accounting services, office, salary and administrative expenses and to finance project development (primarily to help with the shipment of natural gas).
Given these accomplishments, IGDC's key business objective for fiscal year 2004/2005 include:
Energy Program
1) Natural Gas
- Increase the purchase and sales of Canadian First Nations natural gas into the U.S. nine-fold each quarter to finally ship a total of 30 billion cubic feet of natural gas for fiscal year 2004/2005.
2) Gas Fired Power Plant Projects - Complete power purchase agreements - Obtain funding for first Peaker Plant project
- Begin construction on first 43 MW Peaker Plant Project - Obtain funding for first 49.5 MW Baseload Plant
3) Mag Power
- Develop franchise network and distribution model for the Mag Power units
- Begin selling the Mag Power units to business and home markets in mid 2005.
Tribal Finance
1) IGDC Mortgage Group
- Complete Joint Venture agreements with financial/housing partners - Begin first two housing projects
Healthcare Program
- Complete pharmaceutical assessments and complete first contract to introduce generic pharmaceuticals into Tribal clinics.
- Submit proposal for diabetes detection and diagnosis program - Secure funding and site for two diabetes treatment centers.
LIQUIDITY AND CAPITAL RESOURCES
From inception of the business to June 30, 2004, the Company's operations have been financed primarily through the sale of common stock and the issuance of convertible notes payable. At June 30, 2004, the Company had approximately $191,370 in cash.
For the fiscal year, ended June 30, 2004, net cash used for operating activities was $1,844,384, as compared to $778,778 in the fiscal year ended June 30, 2003. Net cash used by operating activities in fiscal year ended June 30, 2004 consisted primarily of an operating loss of $3,464,684, offset by stock issued for services of $1,295,332.
For the fiscal year, ended June 30, 2004, net cash used by investing activities was $206,608 compared to $11,383 for the previous fiscal year.
Net cash flows from financing activities for the fiscal year ended June 30, 2004 was $2,219,460. This was attributable primarily to the proceeds from issuance of common stock of $1,924,598 and proceeds from convertible notes payable of $542,000 partially offset by a repayment of convertible notes payable of $36,396 and repayment of notes to majority stockholder of $320,152.
Net cash flows from financing activities for the fiscal year ended June 30, 2003 was $813,085. This was attributable primarily to the proceeds from issuance of notes payable of $34,909 and the proceeds from issuance of common stock of $321,868. This was partially offset by repayment of convertible notes payable of $17,000.
The Company had total liabilities of $1,763,168 and $1,466,231 as of June 30, 2004 and 2003 respectively. The increase in receivable from parent company offset the increase of notes payable (non-convertible) of $300,000.
The Company's liquidity has been materially and adversely affected by continuing operating losses. The Company has no revenue from operations and is dependant on the majority stockholder and private financing to fund its day-to-day cash requirements. The Company currently does not have sufficient capital resources or sources of liquidity through operations to finance its planned operations during the next twelve months. The Company intends to obtain the necessary funds to support its planned operations during the next twelve months in part from private equity investors. During the first quarter of the year 2004, IGDC obtained approximately $1,100,000 in operating capital through 506-limited offering memorandum which will offer for sale to qualified investors to maintain its pace as it moves toward completion of its energy, pharmaceutical and investment development goals with native tribes in the U.S. and Canada. There is no assurance that sufficient additional financing will be available to the Company on acceptable terms, or at all. The inability to obtain such financing could have a material adverse effect on the Company's planned operations and financial condition during the next twelve months.
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